Of all the pithy tips that Jack Bogle has imparted to investors over the years, my favourite is this, “Nobody knows nothing”. The investing industry earns a fortune from the notion that it knows what the future holds. As the outcome of the Brexit referendum showed yet again, it doesn’t.
Of course, there are a few individuals (brokers and hedge fund managers, mainly) who did make a killing on Friday. As you’d expect, it’s the lucky few who bet big on a Leave vote who are hogging the media limelight now. But, in aggregate, professional investors (and their clients) lost quite heavily.
I predicted on Friday that the weekend money pages would be full of Brexit-related investment ideas designed to enrich others at investors’ expense, and sure enough they were. For the industry, episodes like these are massive sales opportunities. Every time, it churns out the same old myths, which always seem so plausible and yet have no actual grounding in evidence. For example:
Active funds are better in market downturns because managers can take evasive action Yes, in theory they can, but in practice they generally don’t. In the US on Friday, for example, according to Morningstar, the average active mutual fund lagged the index by 0.24%. Some funds lost 10% or more in just one day.
Times of volatility such as these call for active management Wrong again. Yes, it’s possible that the active fund you happened to choose will outperform if we are, as some “experts” say, heading for a prolonged bear market. But the evidence shows that you’re better off with a broadly diversified portfolio of index funds.
Such-and-such a fund manager is good in a crisis and will ride out this one too In times of volatility, the media typically gauges opinions from fund managers who’ve bucked the trend when markets have fallen before. Again, the data points to an almost total lack of persistence in outperformance. A fund that fares well in one crisis often comes badly unstuck in the next.
Fund x or y has had stellar three-year returns. Now is a buying opportunity This is another old chestnut. The industry loves to tout funds with a strong recent track record, and when episodes such as Brexit cause prices to fall, we often read that now is a good time to buy into a fund that’s on a roll. But the evidence shows that recent winners are often just the funds to avoid.
As my fellow blogger Ben Carlson pointed out the other day, we can expect a bull market in opinions in the coming days and weeks. As usual, the vast majority of predictions made will prove wildly inaccurate. Almost invariably at times like these the best course of action for investors with the right plan in place is inaction.
Don’t get me wrong. I’m as gutted as the next Remain voter about the outcome of the referendum, and I’m just as convinced now as I was in the early hours of Friday morning that, as a country, we made the wrong decision. But hey, we live in a democracy, which is a wonderful privilege, and if setbacks like the Brexit vote are the price we have to pay, then so be it.
The bottom line is that life will go on and that markets will find a level. So don’t pay too much attention to the doom-mongers, especially those who say that, in economic terms, the United Kingdom is now doomed to mid-table mediocrity. Yes, it looks very bleak from here. But the British are a resilient people and we’re at our best with our backs to the wall. Who knows? We might surprise you again, like we did on Friday.